The Financial Conduct Authority (FCA) has proposed a cap or outright ban on exit fees as it put forth recommendations from its investment platforms market study.
The regulator also committed to consult on rules that will allow investors to switch platforms and remain in the same fund without having to sell their investments.
It said that, while competition is generally working well, some consumers and financial advisers can find it difficult to shop around and switch to a platform that better meets their needs. This is mainly due to the time, complexity and cost involved, it added.
Indeed, consumers can face charges worth hundreds of pounds should they decide to switch platforms.
“The package we’ve announced should make it less expensive and time-consuming for investors to shop around and move to the platform that best meets their needs,” said Christopher Woolard, executive director or strategy and competition at the FCA.
“As part of that, we believe it is right that we restrict fees, so that people can move their money freely.”
The rules will not only encompass investment platforms, but also include firms offering a comparable service to retail clients, like insurance companies and wealth management services.
The FCA said it would seek views from the wider market about how a restriction would work before consulting on any final rules.
Market Reaction
The moves were broadly welcomed by many of the leading investment platforms in the UK, a number of which stressed they did not charge exit fees, anyway. “We don’t believe in hidden fees for the consumer and, as such, we do not charge exit fees,” says Stuart Welch, head of Fidelity Personal Investing.
Interactive Investor said that while it permanently removed exit fees in November, it has not charged an exit fee since December 2017. “We wholeheartedly agree with an outright ban on exit fees,” says chief executive Richard Wilson.
“Capping them doesn’t solve the issues because it’s a recipe for rip offs. Exit fees inhibit freedom of choice and transparency. Other firms are charging excessive exit fees.” Very few consumers are aware they will be charged an exit fee when they sign up, he adds.
Chris Hill, CEO of Hargreaves Lansdown, the UK’s largest online investment platform, added that consumers will benefit as the industry continues to work together to automate and improve the transfer process. Currently, he explains, most switches are done on a manual, per-line-of-stock basis.
Recommendations on the issue of multiple share classes was also welcomed, with Andy Bell, CEO at AJ Bell, claiming this presented a bigger barrier to platform switches.
“Ultimately, enabling easier transfers of assets between platforms and other competing products will ensure customers are able to move more easily to better value services and will ensure healthy competition in the sector,” Bell adds.
Should the FCA Have Gone Further?
While supporting the ban on fees, Adrian Lowcock, head of personal investing at Willis Owen, says it’s only a step in the right direction. “More work needs to be done to remove the confusing jargon and different terminology for fees and charges across the industry.”
Nick Blake, head of personal investing at Vanguard Europe, meanwhile, urges the FCA to set a mandatory time limit for organisations to complete each of their steps during the transfer process.
Additionally, Iqbal V. Gandham, UK managing director at eToro, notes that the review highlights that fund platforms often have poor execution on trades in individual stocks, too. This can cost investors up to £195 million per year before fees, but "is hardly looked at in the review".
"Platforms should not be penalising individuals for wanting to take charge of their investments by purchasing stocks instead of funds," says Gandham. "The best chance we have of getting people investing is to encourage them to invest in companies they care about.
"Opaque funds make this difficult; stock trading could be the answer to getting more people investing, but poor execution and high fees risk holding people back."
Bell says he was disappointed the regulator “sidestepped” the issue of platform fee disclosure. “We would like a requirement for platforms to show annual charges in pounds and pence and how they compare to the wider market,” he explains.
This would give investors a “simple starting point” when comparing platforms and assessing value for money, he says. Based on numbers from 2016, platform fees per £100,000 invested ranged from £220 to £540 a year, he adds. “This is a huge difference for what is, in essence, a commoditised service.”
Ultimately, says David Ferguson, CEO of Nucleus Financial Group, the use of better analytics and the improved transparency brought about by Mifid II, should apply further downward pressure on fund fees.
"Over time, this will improve end-to-end value for money and create clear differentiation between those platforms that aim to improve client outcomes and those which exist primarily to sell expensive in-house funds," he concludes.
